Word: banking
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Back in September, V.V. Chari, an economist at the University of Minnesota and an adviser to the Federal Reserve Bank of Minneapolis, got a call from a Congressman. Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were arguing that they needed $700 billion to save the nation's financial system, and the Congressman wanted to know what to make of it all. Chari said he didn't know - he hadn't looked at the data. Policymakers kept talking about how banks weren't lending to businesses or to individuals or even to each other, so Chari pulled numbers...
...during all of that, there was also persistent anecdotal evidence that lending to credit-worthy borrowers was doing just fine - it seemed every other day some community bank CEO was on CNBC talking about how many loans his institution was making to small businesses and people who wanted to buy cars or houses. As the story of Chari, his surprise realization, and the academic dialogue that followed make clear, understanding what is happening in the economy - let alone how to fix it - is an incredibly difficult task, even for people who have built their entire careers around doing just that...
Meanwhile, a group of economists at the Federal Reserve Bank of Boston had been noticing the same thing. "We were trying to understand why these numbers looked the way they did," says Burcu Duygan-Bump. Partly because of conversations the economists had with Fed staffers in the banking supervision division, the group came to believe the aggregate data was obscuring the underlying dynamics of the financial system. "If you say New England has a snowstorm with an average snowfall of two inches, that might not reflect the fact that Boston got ten inches and northern Maine got none," says Ethan...
...about the same time as the Boston Fed piece came out, two finance professors at Harvard Business School, David Scharfstein and Victoria Ivashina, wrote a paper called "Bank Lending During the Financial Crisis of 2008." Scharfstein and Ivashina focused in on a database of new loans made to large corporations and documented a 36% drop during August-October 2008, as compared with the three months prior. They, too, argued that drawn-downs were artificially inflating overall lending figures. Yes, there was lending, but it was involuntary, and often to struggling companies - like GM and Tribune - that banks might not otherwise...
...that sort of involuntary lending mean that other potential borrowers were getting crowded out? In a rebuttal to the Scharfstein paper, Chari and his co-authors wrote that they hadn't seen any data showing that banks weren't lending to credit-worthy companies asking for loans simply because certain firms were tapping pre-existing credit lines. "The argument is if you're a new customer walking into a bank, it's impossible for you to get a loan," says Chari. "That story may be true, but there's no convincing evidence that's what's going...